On June 23, 2017, the U.S. Supreme Court ruled against a Wisconsin family in a property rights case that makes it more difficult for property owners to establish a regulatory taking claim under the Fifth Amendment.
The case arose from property owners’ attempt to sell a plot of land along the St. Croix River to pay for improvements to the adjacent lot. County officials claimed that the sale was not allowed because local regulations prohibited the sale of adjacent lots under common ownership from being sold or developed as separate lots. The owners, in turn, brought suit under the Takings Clause of the Fifth Amendment, alleging that the regulation stripped their land of its value because it could not be sold or developed as a separate lot, and that they were entitled to what the vacant lot was worth. In response, the state, considering the property to be a single lot versus two separate lots, argued that it owed the family nothing because the market value was not significantly affected by the regulation as the owners were still able to use and enjoy their property.
The Wisconsin Court of Appeals sided with the state, finding that the local regulation merged the two lots, thus mitigating the effect of the regulation’s impact on the property, and requiring the owners to enjoy use of the lots together or sell the two lots as a whole.
In a 5-3 decision (the case was heard before Justice Gorsuch joined the Court), the Supreme Court ruled in favor of the state and embraced a new three-factor test for identifying the proper unit of property against which to assess the effect of a challenged regulation (i.e., the “denominator question”). According to the Court, the three factors used to determine the boundaries of the property at issue in regulatory takings cases include: “(1) the treatment of the land under state and local law; (2) the physical characteristics of the land; and (3) the prospective value of the regulated land.”
With respect to the third factor, the Court indicated that the analysis should give “special attention to the effect of burdened land on the value of other holdings.” Put another way, although a use restriction may decrease the market value of the property, the impact may be mitigated if the restricted land “adds value to the remaining property, such as by increasing privacy, expanding recreational space, or preserving surrounding natural beauty.”
Applying the multifactor test to the case at hand, the Court concluded that all three factors indicated that the property owners’ two lots should treated as a single property for the following reasons: (1) Wisconsin property law treated the two lots as a single property; (2) the lots were contiguous, and their topography and riverfront location made land-use regulations that limit their potential usage predictable; and (3) the lots were more valuable when combined, allowing increased privacy, recreational space and potentially, a larger residence.
Upon deciding to treat the two lots as a whole, the Court then analyzed the regulation under applicable precedent and determined that no compensable regulatory taking occurred. The Court held that the owners did not suffer a taking under Lucas v. S.C. Coastal Council, as they had not been deprived of “all economically beneficial or product use of the land.” Specifically, the Court found that the property could still be used as a residential property and that the value of the combined property had decreased by less than 10% as a result of the regulatory burden. Furthermore, the Court explained that the owners did not suffer a taking under Penn Central Transportation Co. v. New York City, because the owners could not reasonably say they expected to sell or develop the lots separately, given the pre-existence of the state regulation.
The text of the opinion is available here: https://www.supremecourt.gov/opinions/16pdf/15-214_f1gj.pdf.